"Lower commodity prices and Canadian dollar are certainly affecting the way investors view Canadian commercial real estate, but low interest rates, generally strong fundamentals and a scarcity of available core product are keeping cap rates low," said Scott Chandler, President & CEO at Cushman & Wakefield.

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The dramatic decline in oil prices is having a deep-reaching impact on provincial economies and is re-shaping our view of the commercial real estate in Canada. While real estate fundamentals remain strong, the full impact of low oil and other commodity prices has yet to work its way through the system. Historically, demand for real estate in cities such as Calgary and Edmonton has had a tendency to recover with the same voracity as on their downward journey. But as long as oil and commodity prices remain low, markets such as Toronto, Vancouver and Montreal will see a clear positive shift in expansionary momentum, while net oil producing markets will see slowing fundamentals.

Over the last two years, the flows of real estate equity leaving Canada far outweighs the incoming capital invested - more than 7 times the capital leaving the country than entering through foreign investors. While the previous strength of the Canadian dollar and significant lack of attractive investment opportunities has limited foreign inflows, it is expected that the declining value of the dollar and a significant wave of Asian equity, predominantly from Chinese life insurance companies, will see the inbound volumes continuing to rise in the coming years. Inbound capital increased by 39% last year. The significant volume of outbound capital is largely attributable to Canadian pension funds, with increasing allocations to real estate, seeking "core" opportunities that simply are not available in the open market in Canada. The bulk of this capital is directed to varying US markets, but has also targeted core cities in Europe, South America and Asia.

Capitalization rates remain aggressive for major Canadian cities, although it is unclear whether rapidly changing regional outlooks could place upward pressure on cap rates in the short term. Despite a general decline in bond yields, it is unlikely that cap rates will shift further downwards due to factors such as lending floors keeping levered returns constant and the uncertain outlook across the country. Notwithstanding the foregoing, the lack of opportunities to acquire best in class real estate assets will likely keep cap rates for core product low.

Cushman & Wakefield advises and represents clients on all aspects of property occupancy and investment. Founded in 1917, it has 248 offices in 58 countries, employing more than 16,000 professionals. It offers a complete range of services to its occupier and investor clients for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, appraisal, consulting, corporate services, and property, facilities, project and risk management. To learn more, click HERE.